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Commissioner of Internal Revenue vs. Seagate Technology (Philippines)
132 SUPREME COURT REPORTS ANNOTATED
Commissioner of Internal Revenue vs. Seagate Technology
(Philippines)
* as a tax on consumption, for which the direct liability is imposed on one
G.R. No. 153866. February 11, 2005.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent.
Taxation; Tax Exemption; Value Added Tax (VAT); Petitioner is not
subject to internal revenue laws and regulations and is even entitled to tax
credits.—From the above-cited laws, it is immediately clear that petitioner
enjoys preferential tax treatment. It is not subject to internal revenue laws
and regulations and is even entitled to tax credits. The VAT on capital
goods is an internal revenue tax from which petitioner as an entity is
exempt. Although the transactions involving such tax are not exempt,
petitioner as a VAT-registered person, however, is entitled to their credits.
Same; Same; Same; The VAT is an indirect tax that may be shifted or
passed on to the buyer, transferee or lessee of the goods, properties or
services.—Viewed broadly, the VAT is a uniform tax ranging, at present,
from 0 percent to 10 percent levied on every importation of goods, whether
or not in the course of trade or business, or imposed on each sale, barter,
exchange or lease of goods or properties or on each rendition of services in
the course of trade or business as they pass along the production and
distribution chain, the tax being limited only to the value added to such
goods, properties or services by the seller, transferor or lessor. It is an
indirect tax that may be shifted or passed on to the buyer, transferee or
lessee of the goods, properties or services. As such, it should be understood
not in the context of the person or entity that is primarily, directly and
legally liable for its payment, but in terms of its nature as a tax on
consumption. In either case, though, the same conclusion is arrived at.
Same; Same; Same; Zero-rated transactions generally refer to the export
sale of goods and supply of services.—Zero-rated transactions generally
refer to the export sale of goods and supply of services. The tax rate is set at
zero. When applied to the tax base, such rate obviously results in no tax
chargeable against the purchaser. The seller of such transactions charges
no output tax, but can claim
_______________
* THIRD DIVISION.
133
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a refund of or a tax credit certificate for the VAT previously charged by
suppliers.
Same; Same; Same; Respondent as an exempt entity, can neither be
directly charged for the VAT on its sales nor indirectly made to bear as
added cost to such sales, the equivalent VAT on its purchases.—Applying
the special laws we have earlier discussed, respondent as an entity is
exempt from internal revenue laws and regulations. This exemption covers
both direct and indirect taxes, stemming from the very nature of the VAT
person but the indirect burden is passed on to another. Respondent, as an
exempt entity, can neither be directly charged for the VAT on its sales nor
indirectly made to bear, as added cost to such sales, the equivalent VAT on
its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where
the law does not distinguish, we ought not to distinguish.
Same; Same; Same; Tax Refunds; Claimants of tax refunds bear the
burden of proving the factual basis of their claims; and of showing, by
words too plain to be mistaken, that the legislature intended to exempt them.
—Tax refunds are in the nature of such exemptions. Accordingly, the
claimants of those refunds bear the burden of proving the factual basis of
their claims; and of showing, by words too plain to be mistaken, that the
legislature intended to exempt them. In the present case, all the cited legal
provisions are teeming with life with respect to the grant of tax exemptions
too vivid to pass unnoticed. In addition, respondent easily meets the
challenge.
PETITION for review on certiorari of a decision of the Court of
Appeals.
The facts are stated in the opinion of the Court.
     Quisumbing and Torres for respondent.
PANGANIBAN, J.:
Business companies registered in and operating from the Special
Economic Zone in Naga, Cebu—like herein respondent—are entities
exempt from all internal revenue taxes and
134
134 SUPREME COURT REPORTS ANNOTATED
Commissioner of Internal Revenue vs. Seagate Technology
(Philippines)
the implementing rules relevant thereto, including the value-added
taxes or VAT. Although export sales are not deemed exempt
transactions, they are nonetheless zero-rated. Hence, in the present
case, the distinction between exempt entities and exempt
transactions has little significance, because the net result is that
the taxpayer is not liable for the VAT. Respondent, a VAT-
registered enterprise, has complied with all requisites for claiming
a tax refund of or credit for the input VAT it paid on capital goods it
purchased. Thus, the Court of Tax Appeals and the Court of
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Appeals did not err in ruling that it is entitled to such refund or
credit.
The Case
1
Before us is a Petition for Review under Rule 45 of2 the Rules of
Court, seeking to set aside the May 27, 2002 Decision of the Court
of Appeals (CA) in CA-G.R. SP No. 66093. The decretal portion of
the Decision reads as follows:
“WHEREFORE, foregoing premises considered, the petition for review is
3
DENIED for lack of merit.”
The Facts
The CA quoted the facts narrated by the Court of Tax Appeals
(CTA), as follows:
“As jointly stipulated by the parties, the pertinent facts x x x involved in
this case are as follows:
1. [Respondent] is a resident foreign corporation duly registered with
the Securities and Exchange Commission to do business in the
Philippines, with principal office address at the
_______________
1 Rollo, pp. 8-20.
2 Id., pp. 21-30. Thirteenth Division. Penned by Justice Mercedes Gozo-Dadole, with the
concurrence of Justices Salvador J. Valdez, Jr. (chair) and Amelita G. Tolentino (member).
3 CA Decision, p. 10; Rollo, p. 30. Bold types and caps in the original.
135
VOL. 451, FEBRUARY 11, 2005
Commissioner of Internal Revenue vs. Seagate Technology (Philippines)
new Cebu Township One, Special Economic Zone, Barangay Cantao-an,
Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly
appointed and empowered to perform the duties of his office,
including, among others, the duty to act and approve claims for
refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone
Authority (PEZA) and has been issued PEZA Certificate No. 97-044
pursuant to Presidential Decree No. 66, as amended, to engage in
the manufacture of recording components primarily used in
computers for export. Such registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as
evidenced by VAT Registration Certification No. 97-083-000600-V
issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been
filed by [respondent];
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6. An administrative claim for refund of VAT input taxes in the
amount of P28,369,226.38 with supporting documents (inclusive of
the P12,267,981.04 VAT input taxes subject of this Petition for
Review), was filed on 4 October 1999 with Revenue District Office
No. 83, Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner]
on [respondent’s] claim for VAT refund.
“The administrative claim for refund by the [respondent] on October 4,
1999 was not acted upon by the [petitioner] prompting the [respondent] to
elevate the case to [the CTA] on July 21, 2000 by way of Petition for Review
in order to toll the running of the two-year prescriptive period.
“For his part, [petitioner] x x x raised the following Special and
Affirmative Defenses, to wit:
1. [Respondent’s] alleged claim for tax refund/credit is subject to
administrative routinary investigation/examination by [petitioner’s]
Bureau;
2. Since ‘taxes are presumed to have been collected in accordance with
laws and regulations,’ the [respondent] has the burden of proof that
the taxes sought to be refunded were erroneously or illegally
collected x x x;
136
136 SUPREME COURT REPORTS ANNOTATED
Commissioner of Internal Revenue vs. Seagate Technology
(Philippines)
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the
Supreme Court ruled that:“A claimant has the burden of proof to
establish the factual basis of his or her claim for tax credit/refund.”
4. Claims for tax refund/tax credit are construed in ‘strictissimi juris’
against the taxpayer. This is due to the fact that claims for
135 refund/credit [partake of] the nature of an exemption from tax.
Thus, it is incumbent upon the [respondent] to prove that it is
indeed entitled to the refund/credit sought. Failure on the part of
the [respondent] to prove the same is fatal to its claim for tax credit.
He who claims exemption must be able to justify his claim by the
clearest grant of organic or statutory law. An exemption from the
common burden cannot be permitted to exist upon vague
implications;
5. Granting, without admitting, that [respondent] is a Philippine
Economic Zone Authority (PEZA) registered Ecozone Enterprise,
then its business is not subject to VAT pursuant to Section 24 of
Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax
Code, as amended. As [respondent’s] business is not subject to VAT,
the capital goods and services it alleged to have purchased are
considered not used in VAT taxable business. As such, [respondent]
is not entitled to refund of input taxes on such capital goods
pursuant to Section 4.106.1 of Revenue Regulations No. ([RR])7-95,
and of input taxes on services pursuant to Section 4.103 of said
regulations.
6. [Respondent] must show compliance with the provisions of Section
204 (C) and 229 of the 1997 Tax Code on filing of a written claim for
refund within two (2) years from the date of payment of tax.’
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Memorandum, signed by Attys. Dennis G. Dimagiba and Franklin A. Prestousa, was filed on
“On July 19, 2001, the Tax Court rendered a decision granting the claim for March 7, 2003.
4
refund.”
138

Ruling of the Court of Appeals 138 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Seagate Technology (Philippines)
The CA affirmed the Decision of the CTA granting the claim for
refund or issuance of a tax credit certificate (TCC) in favor of resenting alleged unutilized input VAT paid on capital goods purchased for
respondent in the reduced amount of P12,122,922.66. the period April 1, 1998 to June 30, 1999.”
6

_______________

4 CA Decision, pp. 2-4; Rollo, pp. 22-24. Citations omitted. The Court’s Ruling

137 The Petition is unmeritorious.

VOL. 451, FEBRUARY 11, 2005
Commissioner of Internal Revenue vs. Seagate Technology
(Philippines)
This sum represented the unutilized but substantiated input VAT
paid on capital goods purchased for the period covering April 1,
1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself
only of the fiscal incentives under Executive Order No. (EO) 226
(otherwise known as the Omnibus Investment Code of 1987), not of
those under both Presidential Decree No. (PD) 66, as amended, and
Section 24 of RA 7916. Respondent was, therefore, considered
exempt only from the payment of income tax when it opted for the
income tax holiday in lieu of the 5 percent preferential tax on gross
income earned. As a VAT-registered entity, though, it was still
subject to the payment of other national internal revenue taxes, like
the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code
nor Sections 4.106-1 and 4.103-1 of RR 7-95 were applicable.
Having paid the input VAT on the capital goods it purchased,
respondent correctly filed the administrative and judicial claims for
its refund within the two-year prescriptive period. Such payments
were—to the extent of the refundable value—duly supported by
VAT invoices or official receipts, and were not yet offset against any
output VAT liability. 5
Hence this Petition.
Sole Issue:
137 Entitlement of a VAT-Registered PEZA Enterprise to
a Refund of or Credit for Input VAT
No doubt, as 7 a PEZA-registered enterprise within a special
economic8
zone, respondent is entitled to9 the fiscal incentives
10
and
benefits provided for in either PD 66 or EO 226. It shall,
moreover, enjoy all privileges, benefits,11 advantages
12
or exemptions
under both Republic Act Nos. (RA) 7227 and 7844.
_______________
6 Petitioner’s Memorandum, p. 5; Rollo, p. 99. Original in upper case.
7 Referred to as ecozone, it is a selected area with highly developed, or which has
the potential to be developed into, agroindustrial, industrial, tourist/recreational,
commercial, banking, investment and financial centers. §4(a), Chapter I of RA 7916,
otherwise known as “The Special Economic Zone Act of 1995.”
8 §35, Chapter III of RA 7916.
9 PD 66 is the law creating the Export Processing Zone Authority or EPZA. See 1st
paragraph of §23, Chapter III of RA 7916.
10 EO 226, in Article 1 thereof, is also known as the “Omnibus Investments Code”
of 1987. See 1st paragraph of §23, Chapter III of RA 7916.
11 RA 7227, in §1 thereof, is also known as the “Bases Conversion and
Development Act of 1992.” See §51, Chapter VI of RA 7916.
12 RA 7844, in §1 thereof, is also known as the “Export Development Act of 1994.”
See 2nd paragraph of §23, Chapter III of RA 7916.
139

VOL. 451, FEBRUARY 11, 2005 139

Sole Issue
Commissioner of Internal Revenue vs. Seagate Technology
Petitioner submits this sole issue for our consideration: (Philippines)

“Whether or not respondent is entitled to the refund or issuance of Tax

Credit Certificate in the amount of P12,122,922.66 rep-
_______________
5 The Petition was deemed submitted for decision on April 3, 2003, upon receipt by the
Court of petitioner’s Memorandum, signed by Assistant Solicitors General Cecilio O. Estoesta
and Fernanda Lampas Peralta and Associate Solicitor Romeo D. Galzote. Respondent’s
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Preferential Tax Treatment
Under Special Laws
If it avails itself of PD 66, notwithstanding the provisions of other
laws to the contrary, respondent shall not be subject to internal
revenue laws and regulations for raw materials, supplies, articles,
equipment, machineries, spare parts and wares, except those
prohibited by law, brought into the zone to be stored, broken up,
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repacked, assembled, installed, sorted, cleaned, graded or otherwise The VAT on capital goods is an internal revenue tax from which
processed, manipulated, manufactured,
13
mixed or used directly or petitioner as an entity is exempt. Although
indirectly in such activities. Even so, respondent would enjoy a
net-operating loss carry over; accelerated depreciation; foreign _______________
exchange and financial assistance;
14
and exemption from export
taxes, local taxes and licenses. 18 (b) of the 2nd paragraph of §12 of RA 7227.
Comparatively, the same exemption 15
from internal revenue laws 19 §51, Chapter VI of RA 7916.
and regulations applies if EO 226 is chosen. Under this law, 20 §51, Chapter VI of RA 7916.
respondent shall further be entitled to an income tax holiday; 21 (c) of the 2nd paragraph of §12 of RA 7227.
additional deduction for labor expense; simplification of customs 22 (d) of the 2nd paragraph of §12 of RA 7227.
procedure; unrestricted use of consigned equipment; access to a 23 Referred to as the Central Bank under (e) of the 2nd paragraph of §12 of RA
bonded manufacturing warehouse system; privileges for foreign 7227.
nationals employed; tax credits on domestic capital equipment, as 24 §17 of RA 7844.
well as for taxes and duties on raw materials; and exemption from 25 §16 of RA 7844. See 2nd paragraph of §23, Chapter III of RA 7916.
contractors’ taxes, wharfage dues, taxes and duties on imported 26 PD 1853 was the law that took effect in 1983, requiring deposits of duties upon
capital equipment
16
and spare parts, export taxes, duties,17imposts the opening of letters of credit to cover imports.
and fees, local taxes and licenses, and real property taxes. 27 2nd paragraph of §4, Chapter I of RA 7916.

141
_______________

13 §17(1) of PD 66. VOL. 451, FEBRUARY 11, 2005 141

14 §18 of PD 66.
Commissioner of Internal Revenue vs. Seagate Technology
15 Article 77(1), Book VI of EO 226.
(Philippines)
16 Article 39 of EO 226, certain paragraphs of which are expressly repealed by the
2nd paragraph of §20 of RA 7716, otherwise known as the “Expanded Value Added
Tax Law,” deemed effective May 27, 1994. See Commissioner of Internal Revenue v. the transactions involving
28
such tax are not exempt, petitioner as a
Michel J. Lhuillier Pawnshop, Inc., 406 SCRA 178, 187, July 15, 2003. VAT-registered person, however, is entitled to their credits.
17 Article 78 of EO 226.
Nature of the VAT and
140 the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at present, from

140 SUPREME COURT REPORTS ANNOTATED 0 percent to 10 percent levied on every importation of goods,
Commissioner of Internal Revenue vs. Seagate Technology whether or not in the course of trade or business, or imposed on
(Philippines) each sale, barter, exchange or lease of goods or properties
29
or on each
rendition of services in the course of trade or business as they pass
A privilege available to respondent under the provision in RA 7227 along the production and 30
distribution chain, the tax being limited
on tax and duty-free importation of raw materials, 19capital and only to the value added to31such goods, properties or services by the
18
equipment —is, ipso facto, also accorded to the zone under RA seller, transferor or lessor. It is an indirect tax that may be shifted
7916. Furthermore, the latter law—notwithstanding 20other existing or passed on to the32 buyer, transferee or lessee of the goods,
laws, rules and regulations to the contrary—extends to that zone properties or services. As such, it should be understood not in the
the provision stating that no local or national taxes shall be context of the person or entity that is primarily, directly and legally
21
imposed therein. No exchange control policy shall be applied; and liable for its33payment, but in terms of its nature as a tax on
free markets for foreign exchange, gold, securities and future shall consumption. In either case, though, the same conclusion is
22
be allowed and maintained. Banking and finance shall also be arrived at.
liberalized under minimum Bangko Sentral regulation with the
establishment of foreign currency depository units of 23local _______________
commercial banks and offshore banking units of foreign banks.
28 A “VAT-registered person” is a taxable person who has registered for VAT
In the same vein, 24respondent benefits under RA 7844 from
purposes under §236 of the Tax Code. Deoferio and Mamalateo, The Value Added
negotiable tax credits for locally-produced materials used as
Tax in the Philippines (1st ed., 2000), p. 265. See 9th paragraph of §4.107-1(a) of
inputs. Aside from the other incentives possibly already granted to
Revenue Regulations No. (RR) 7-95, implemented beginning January 1, 1996, as
it by the25 Board of Investments, it also26 enjoys preferential credit
amended by §6 of RR 6-97, effective January 1, 1997.
facilities and exemption from PD 1853.
29 §§105 to 109 of RA 8424, as amended, otherwise known as the Tax Code.
From the above-cited laws, it is immediately
27
clear that petitioner
30 Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan, 163
enjoys preferential tax treatment. It is not subject to internal
SCRA 371, 378-379, June 30, 1988.
revenue laws and regulations and is even entitled to tax credits.
31 De Leon, The Fundamentals of Taxation (12th ed., 1998), p. 131.
32 2nd paragraph of §105 of the Tax Code.

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33 Deoferio, Jr. and Mamalateo, The Value Added Tax in the Philippines (1st ed., Zero-Rated and Effectively
2000), pp. 33 & 36. Zero-Rated Transactions
142 Although both are taxable and similar in effect, zero-rated
transactions differ from effectively zero-rated transactions as to
142 SUPREME COURT REPORTS ANNOTATED their source.
Zero-rated transactions
47
generally refer to the export
48
sale of goods
Commissioner of Internal Revenue vs. Seagate Technology and supply of services. The tax rate is set at zero. When applied
(Philippines) to the tax base, such rate obviously results in no tax chargeable
34
against the49 purchaser. The seller of such transactions charges no
The law that originally imposed the VAT in the country, as well as output tax, but can claim a refund of or a tax credit certificate for
the subsequent amendments
35
of that law, has been drawn from the the VAT previously charged by suppliers.
tax credit method. Such method adopted the mechanics and self-
enforcement features of the VAT as first implemented and practiced 36 _______________
in Europe and subsequently adopted in New Zealand and Canada.
Under the present method that relies on invoices, an entity can 42 §110(B) of the Tax Code.
credit against or subtract from the VAT charged on its 37sales or 43 These are goods or properties with estimated useful lives greater than one year
outputs the VAT paid on its purchases, inputs and imports.
38
and which are treated as depreciable assets under §34(F) [formerly §29(f)] of the Tax
If at
39
the end of a taxable quarter40the output taxes charged by a Code, used directly or indirectly in the production or sale of taxable goods or services.
seller are equal to the input taxes passed on by the suppliers, no 3rd paragraph of §4.106-1(b) of RR 7-95.
payment is required. It is when the 41 output taxes exceed the input These goods also refer to “capital assets” as this term is defined in §39(A)(1) of the
taxes that the excess has to be paid. If, however, the input taxes Tax Code.
exceed the output taxes, the excess 44 De Leon, p. 135.
45 Deoferio, Jr. and Mamalateo, supra, p. 244.
_______________
46 Subject to the provisions of §§106, 108 and 112 of the Tax Code.
47 De Leon, p. 133.
34 EO 273. 48 Deoferio, Jr. and Mamalateo, supra, p. 190.
35 Vitug, J. and Acosta, Tax Law and Jurisprudence (2nd ed., 2000), p. 227. 49 De Leon, p. 133.

See §193(d) of the National Internal Revenue Code of 1977 as further amended by §1 of Pres. 144
Decree No. 1358 dated April 21, 1978, wherein the tax credit method, instead of the cost
deduction method, was mandated to be applied in computing the VAT due.
144 SUPREME COURT REPORTS ANNOTATED
36 Deoferio, Jr. and Mamalateo, supra, p. 34.
Commissioner of Internal Revenue vs. Seagate Technology
37 Id., pp. 34-35.
(Philippines)
38 “Output taxes” refer to the VAT due on the sale or lease of taxable goods,
properties or services by a VAT-registered or VAT-registrable person. See last
paragraph of §110(A)(3) and §236 of the Tax Code. Effectively
50
zero-rated transactions,
51
however, refer to the sale of
39 Presumed to be VAT-registered. goods or supply of services to persons or entities whose
40 By “input taxes” is meant the VAT due from or paid by a VAT-registered person exemption under special laws or international agreements to which
in the course of trade or business on the importation of goods or local purchases of the Philippines52
is a signatory effectively subjects such transactions
goods or services, including the lease or use of property from a VAT-registered to a zero rate. Again, as applied to the tax base, such rate does not
person. See penultimate paragraph of §110(A)(3) of the Tax Code. yield any tax chargeable against the purchaser. The seller who
41 §110(B) of the Tax Code. charges zero output tax on such transactions can also claim a
refund of or a tax credit certificate for the VAT previously charged
VAT-registered persons shall pay the VAT on a monthly basis. §114(A) of the Tax Code. by suppliers.
143 Zero Rating and
Exemption
VOL. 451, FEBRUARY 11, 2005 143
In terms of the VAT computation, zero rating and exemption are the
Commissioner of Internal Revenue vs. Seagate Technology same, but the extent of relief that results from either one of them is
(Philippines) not. 53
Applying the destination
54
principle to the exportation of goods,
42
shall be carried over to the succeeding quarter or quarters. Should automatic zero rating is primarily intended to be enjoyed by the
the input taxes result from zero-rated or effectively zero-rated seller who is directly and legally liable for the VAT, making such
43
transactions or from the acquisition of capital 44goods, any excess seller internationally competitive by allowing the refund
55
or credit of
over the45output taxes shall instead be refunded46 to the taxpayer or input taxes that are attributable to export sales. Effective zero
credited against other internal revenue taxes. rating, on the contrary, is intended to benefit the purchaser who,
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not being directly and legally liable for the payment of the VAT, will 59 Deoferio, Jr. and Mamalateo, supra, p. 118.
ultimately bear the burden of the tax shifted by the suppliers. 60 Id., p. 132.
In both instances of zero rating,56 there is total relief for the 61 Id., pp. 132-133.
purchaser from the burden of the tax. But in an exemption 62 De Leon, p. 132.

146
_______________

50 §106(A)(2)(c) of the Tax Code. 146 SUPREME COURT REPORTS ANNOTATED

51 §108(B)(3) of the Tax Code.
Commissioner of Internal Revenue vs. Seagate Technology
52 Deoferio, Jr. and Mamalateo, supra, p. 215.
(Philippines)
53 Under this principle, goods and services are taxed only in the country where
these are consumed. Thus, exports are zero-rated, but imports are taxed. Id., p. 43.
54 In business parlance, “automatic zero rating” refers to the standard zero rating its indirect burden of the VAT shifted to it by its VAT-registered
as provided for in the Tax Code. suppliers, the purchase transaction is not exempt. Applying this
55 Deoferio, Jr. and Mamalateo, supra, p. 189. principle to the case at bar, the purchase transactions entered into
56 Id., p. 43. by respondent are not VAT-exempt. 63
Special laws may certainly exempt transactions from the VAT.
145 However, the Tax Code provides that those falling under PD 66 are
not. PD 66 is the precursor of RA 7916—the special law under
VOL. 451, FEBRUARY 11, 2005 145 which respondent was registered. The purchase transactions it
entered into are, therefore, not VAT-exempt. These are subject to
Commissioner of Internal Revenue vs. Seagate Technology the VAT; respondent is required to register.
(Philippines) Its sales transactions, however, will 64
either be zero-rated or taxed
57
at the standard rate of 10 percent,65 depending again on the
there is only partial relief, because the purchaser
58
is not allowed application of the destination principle.
any tax refund of or credit for input taxes paid. If respondent enters into such sales transactions with a
purchaser—usually in a foreign country—for use or consumption 66
Exempt Transaction outside the Philippines, these shall be subject to 0 percent. If
and Exempt Party entered into with a purchaser for use or consumption in the
67
Philippines, then these shall be subject to 10 percent, unless the
The object of exemption from the VAT may either 59
be the transaction purchaser is exempt from the indirect burden of the VAT, in which
itself or any of the parties to the transaction. case it shall also be zero-rated.
An exempt transaction, on the one hand, involves goods or Since the purchases of respondent are not exempt from the VAT,
services which, by their nature, are specifically listed in and the rate to be applied is zero. Its exemption under both PD 66 and
expressly exempted from the VAT under the Tax Code, without RA 7916 effectively subjects such transactions to a zero rate,
68

regard to the 60
tax status—VAT-exempt or not—of the party to the because the ecozone within which it is registered is 69 managed and
transaction. Indeed, such transaction is not subject to the VAT, operated by the PEZA as a separate customs territory. This means
but the seller is not allowed any tax refund of or credit for any input that in such zone is created the legal
taxes paid.
An exempt party, on the other hand, is a person or entity granted
_______________
VAT exemption under the Tax Code, a special law or an
international agreement to which the Philippines is a signatory, 63 §109(q) of the Tax Code.
and by virtue
61
of which its taxable transactions become exempt from 64 Deoferio, Jr. and Mamalateo, supra, p. 187.
the VAT. Such party is also not subject to the VAT, but may be 65 Id., p. 69.
allowed a tax refund of or credit for input taxes paid, depending on 66 §106(A)(2) of the Tax Code.
its registration as a VAT or non-VAT taxpayer. 67 §106(A)(1) of the Tax Code.
As mentioned earlier, the VAT is a tax on consumption, the 68 §106(A)(2)(c) of the Tax Code.
amount of which may be shifted or passed on 62
by the seller to the 69 1st paragraph of §8, Chapter I of RA 7916.
purchaser of the goods, properties or services. While the liability is
imposed on one person, the burden may be passed on to another. 147
Therefore, if a special law merely exempts a party as a seller from
its direct liability for payment of the VAT, but does not relieve the
VOL. 451, FEBRUARY 11, 2005 147
same party as a purchaser from
Commissioner of Internal Revenue vs. Seagate Technology
(Philippines)
_______________
70 71
57 Id., p. 121. fiction of foreign territory. Under the cross-border principle of the
58 De Leon, pp. 133 & 135. VAT system being enforced by the Bureau of Internal Revenue
72
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72
(BIR), no VAT shall be imposed to form part of the cost of goods the direct liability is imposed on one person but the indirect burden
destined for consumption outside of the territorial border of the is passed on to another. Respondent, as an exempt entity, can
taxing authority. If exports of goods and services 73
from the neither be directly charged for the VAT on its sales nor indirectly
Philippines to a foreign country are free of the VAT, then the same made to bear, as added cost to such sales, the equivalent VAT on its
rule holds for such exports from the national territory—except purchases. Ubi lex non
specifically declared areas—to an ecozone.
Sales made by a VAT-registered person in the customs territory _______________
to a PEZA-registered entity are considered exports to a foreign
country; conversely, sales by a PEZA-registered entity to a VAT- 75 This zone is akin to the former army bases or installations within the
registered person in 74the customs territory are deemed imports from Philippines. Saura Import and Export Co., Inc. v. Meer, 88 Phil. 199, 202, February
a foreign country. An ecozone—indubitably a geographical 26, 1951.
territory of the Philippines—is, 76 Deoferio, Jr. and Mamalateo, supra, p. 199.
77 An “export processing zone” is a specialized industrial estate located physically
_______________ and/or administratively outside customs territory, predominantly oriented to export
production, and may be contained in an ecozone. §4(a) and (d), Chapter I of RA 7916.
A “customs territory” means the national territory of the Philippines outside of the proclaimed 78 Article 23, Chapter I, Title I, Book I of EO 226. See §2.mm.2), Rule I, Part I of
boundaries of the ecozones, except those areas specifically declared by other laws and/or the “Rules and Regulations to Implement Republic Act No. 7916, otherwise known as
presidential proclamations to have the status of special economic zones and/or free ports. §2.g, ‘The Special Economic Zone Act of 1995.’ ”
Rule 1, Part I of the “Rules and Regulations to Implement Republic Act No. 7916, otherwise 79 Article 77(2), Book VI of EO 226.
known as ‘The Special Economic Zone Act of 1995.’ ” 80 §106(A)(2)(a)(5) of the Tax Code.

70 Deoferio, Jr. and Mamalateo, supra, p. 227. 149

71 This principle is not clearly defined by any law or administrative issuance. See
Id., p. 227.
VOL. 451, FEBRUARY 11, 2005 149
72 §2 of Revenue Memorandum Circular No. (RMC) 74-99 dated October 15, 1999.
Commissioner of Internal Revenue vs. Seagate Technology
This circular is an example of an agency statement of general applicability that takes the form
(Philippines)
of a revenue tax issuance “bearing on internal revenue tax rules and regulations.”
Commissioner of Internal Revenue v. Court of Appeals, 329 Phil. 987, 1009; 261 SCRA 236,
August 29, 1996, per Vitug, J., citing RMC 10-86. See §2(2), Chapter 1, Book VII of Executive distinguit, nec nos distinguere debemus. Where the law does not
Order No. (EO) 292, otherwise known as the “Administrative Code of 1987” dated July 25, distinguish, we ought not to distinguish.
1987. Moreover, the exemption is both express and pervasive for the
following reasons:
73 §106(A)(2)(a) of the Tax Code. First, RA 7916 states that “no taxes, local and national, shall be
74 See Deoferio, Jr. and Mamalateo, supra, p. 201. imposed 81 on business establishments operating within the
ecozone.” Since this law does not exclude the VAT from the
148
prohibition, it is deemed included. Exceptio firmat regulam in
casibus non exceptis. An exception confirms the rule in cases not
148 SUPREME COURT REPORTS ANNOTATED excepted; that is, a thing not being excepted must be regarded as
coming within the purview of the general rule.
Commissioner of Internal Revenue vs. Seagate Technology
Moreover, even though the VAT is not imposed on the entity but
(Philippines)
on the transaction, it may still be passed on and, therefore,
75 indirectly imposed on the same entity—a patent circumvention of
however, regarded in law as foreign soil. This legal fiction is the law. That no VAT shall be imposed directly upon business
necessary to give meaningful
76
effect to the policies of the special law establishments operating within the ecozone under RA 7916 also
creating
77
the zone. If respondent is located in an export processing means that no VAT may be passed on and imposed indirectly.
zone within that ecozone, sales to the export processing zone, even Quando aliquid prohibetur ex directo prohibetur et per obliquum.
without being actually exported, shall78 in fact be viewed as When anything is prohibited directly, it is also prohibited indirectly.
constructively
79
exported under EO 226. Considered as export Second, when RA 8748 was enacted to amend RA 7916, the same
sales, such purchase80 transactions by respondent would indeed be prohibition applied, except for real property taxes that presently are
82
subject to a zero rate. imposed on land owned by developers. This similar and repeated
prohibition is an unambiguous ratification of the law’s intent in not
Tax Exemptions imposing local or national taxes on business enterprises within the
Broad and Express ecozone.
Third, foreign and domestic merchandise, raw materials,
Applying the special laws we have earlier discussed, respondent as
equipment and the like “shall not be subject to x x x internal
an entity is exempt from internal revenue laws and regulations. 83
revenue laws and regulations” under PD 66 —the original
This exemption covers both direct and indirect taxes, stemming
from the very nature of the VAT as a tax on consumption, for which
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_______________ from national internal revenue taxes on imported capital equipment

reasonably 91
needed and exclusively used for the manufacture of their
81 §24, Chapter III of RA 7916.
products; 92on required supplies and spare part for consigned
82 §24, Chapter III of RA 7916, as amended by §4 of RA 8748 dated June 1, 1999.
equipment; and on foreign and domestic merchandise, raw
83 §17(1) of PD 66.
materials, equipment and the like—except those 93
prohibited by law
150 —brought into the zone for manufacturing. In addition, they are
given credits for the value of the national internal revenue taxes
imposed on domestic capital equipment also reasonably94needed and
150 SUPREME COURT REPORTS ANNOTATED exclusively used for the manufacture of their products, as well as
Commissioner of Internal Revenue vs. Seagate Technology for the value of such taxes imposed on domestic raw materials and
(Philippines) supplies that are used in the95
manufacture of their export products
and that form part thereof.
84 Sixth, 96the exemption from local and national taxes granted under
charter of PEZA (then EPZA) that was later amended by RA 7916. 97
RA 7227 are ipso facto accorded to ecozones. In case of doubt,
No provisions in the latter law modify such exemption.
conflicts with respect to such98 tax exemption privilege shall be
Although this exemption puts the government at an initial
resolved in favor of the ecozone.
disadvantage, the reduced tax collection ultimately redounds to the
And seventh, the tax credits under RA 7844—given for im-ported
benefit of the national economy by enticing more 85business
raw materials primarily used in the production of
investments and creating more employment opportunities.
Fourth, even the rules implementing the PEZA law clearly
reiterate that merchandise—except those prohibited by law—“shall _______________
86
not be subject to x x x internal revenue laws87and regulations x x x” 90 Article 11, Chapter I, Book I of EO 226.
if brought to the ecozone’s restricted area for manufacturing by
88 91 Article 39(c), Title III, Book I of EO 226, expressly repealed by the 2nd
registered export enterprises, of which respondent is one. These
paragraph of §20 of RA 7716. Consequently, enterprises registered with the BOI
rules also apply to all enterprises registered with the EPZA prior to
89 after December 31, 1994 will no longer enjoy the incentives provided under said
the effectivity of such rules.
article starting January 1, 1996.
92 Article 39(m), Title III, Book I of EO 226.
_______________ 93 Article 77(1), Book VI of EO 226.
94 Article 39(d), Title III, Book I of EO 226, also expressly repealed by the 2nd
84 Estate of Salud Jimenez v. Philippine Export Processing Zone, 349 SCRA 240,
paragraph of §20 of RA 7716. Consequently, enterprises registered with the BOI
260-261, January 16, 2001. See 4th paragraph, §11, Chapter II of RA 7916.
after December 31, 1994 will no longer enjoy the incentives provided under said
85 Commissioner of Customs v. Philippine Phosphate Fertilizer Corp., G.R. No.
article starting January 1, 1996.
144440, September 1, 2004, 437 SCRA 452, 457.
95 Article 39(k), Title III, Book I of EO 226.
86 §1, Rule VIII, Part V and Rule XV of the “Rules and Regulations to Implement
96 1st paragraph of §12(c) of RA 7227.
Republic Act No. 7916, otherwise known as ‘The Special Economic Zone Act of 1995.’
97 §51, Chapter VI of RA 7916.
”
98 2nd paragraph of §12(c) of RA 7227.
87 A “restricted area” is a specific area within an ecozone that is classified and/or
fenced-in as an export processing zone. §2.h, Rule I, Part I of the “Rules and 152
Regulations to Implement Republic Act No. 7916, otherwise known as ‘The Special
Economic Zone Act of 1995.’ ”
88 A “registered export enterprise” is one that is registered with the PEZA, and 152 SUPREME COURT REPORTS ANNOTATED
that engages in manufacturing activities within the purview of the PEZA law for the Commissioner of Internal Revenue vs. Seagate Technology
exportation of its production. §2.i, Rule I, Part I of the “Rules and Regulations to (Philippines)
Implement Republic Act No. 7916, otherwise known as ‘The Special Economic Zone
Act of 1995.’ ” 99
export goods, and for locally produced raw materials, capital
89 §1, Rule XXV of the “Rules and Regulations to Implement Republic Act No.
equipment100
and spare parts used by exporters of non-traditional
7916, otherwise known as ‘The Special Economic Zone Act of 1995.’ ” See §56,
products —shall also 101
be continuously enjoyed by similar exporters
Chapter VI of RA 7916.
within the ecozone. Indeed, the latter exporters are likewise
151 entitled to such tax exemptions and credits.

Tax Refund as
VOL. 451, FEBRUARY 11, 2005 151 Tax Exemption
Commissioner of Internal Revenue vs. Seagate Technology
To be sure, statutes that grant tax 103
exemptions are construed
(Philippines) 102
strictissimi juris against
104
the taxpayer and liberally in favor of
90 the taxing authority. 105
Fifth, export processing zone enterprises registered with the Tax refunds are in the nature of such exemptions. Accordingly,
Board of Investments (BOI) under EO 226 patently enjoy exemption the claimants of those refunds bear the burden of proving the
106
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106
factual basis of their claims; and of showing, by words too107plain to _______________
be mistaken, that the legislature intended to exempt them. In the
108 Deoferio, Jr. and Mamalateo, supra, p. 155.
present case, all the cited legal provisions are teeming with life with
109 Agpalo, supra, pp. 82-83.
respect to the grant of tax exemptions too vivid to pass unnoticed.
110 Deoferio, Jr. and Mamalateo, supra, p. 218.
In addition, respondent easily meets the challenge.
111 §3(3) of Revenue Memorandum Circular No. (RMC) 74-99.
Respondent, which as an entity is exempt, is different from its
112 §§1 and 2 of PD 66.
transactions which are not exempt. The end result, how-
154
_______________

99 §16(c), Article III of RA 7844. 154 SUPREME COURT REPORTS ANNOTATED

100 §16(e), Article III of RA 7844. Commissioner of Internal Revenue vs. Seagate Technology
101 2nd paragraph of §23, Chapter III of RA 7916. (Philippines)
102 Commissioner of Internal Revenue v. General Foods (Phils.), Inc., 401 SCRA
545, 550, April 24, 2003.
RA 7916, as amended by RA 8748, declared that by creating the
103 Commissioner of Internal Revenue v. Solidbank Corp., 416 SCRA 436, 461,
PEZA and integrating the special economic zones, “the government
November 25, 2003.
shall actively encourage, promote, induce and accelerate a sound
104 Agpalo, Statutory Construction (2nd ed., 1990), p. 217.
and balanced industrial, economic and social development of the
105 BPI Leasing Corp. v. Court of Appeals, 416 SCRA 4, 14, November 18, 2003.
country x x x through the establishment, among others, of special
106 Paseo Realty & Development Corp. v. Court of Appeals, G.R. No. 119286,
economic zones x x x that shall113effectively attract legitimate and
October 13, 2004, 440 SCRA 235.
productive foreign investments.”
107 Surigao Consolidated Mining Co., Inc. v. Collector of Internal Revenue, 119
Under EO 226, the “State shall encourage x x x foreign
Phil. 33, 37; 9 SCRA 728, 732, December 26, 1963.
investments in industry x x x which shall x x x meet the tests of
153 international competitiveness[,] accelerate development of less
developed regions of the country[,] and114result in increased volume
and value of exports for the economy.” Fiscal incentives that are
VOL. 451, FEBRUARY 11, 2005 153 cost-efficient and simple to administer shall be devised and
Commissioner of Internal Revenue vs. Seagate Technology extended to significant projects “to compensate for market
(Philippines) imperfections,115to reward performance contributing to economic
development,” and “to stimulate116the establishment and assist
ever, is that it is not subject to the VAT. The non-taxability of initial operations of the enterprise.” 117

transactions that are otherwise taxable is merely a necessary Wisely accorded to ecozones created under RA 7916 was the
incident to the tax exemption conferred by law upon it as an entity, government’s policy—spelled out118earlier in RA 7227—of converting
108
not upon the transactions themselves. Nonetheless, its exemption into alternative productive
119
uses the former military reservations
120

as an entity and the non-exemption of its transactions lead to the and their extensions, as well as of providing them incentives 121
to
same result for the following considerations: enhance the benefits that would be derived 122
from them in
First, the contemporaneous construction of our tax laws by BIR promoting economic and social development.
authorities
109
who are called upon to execute or administer such
laws will have to be adopted. Their prior tax issuances have held _______________
inconsistent positions brought about by their probable failure to
113 2nd paragraph of §2, Chapter I of RA 7916.
comprehend and fully appreciate the nature of the VAT as a tax on 110 114 Article 2.1, Chapter I of EO 226.
consumption and the application of the destination principle.
115 Article 2.3, Chapter I of EO 226.
Revenue Memorandum Circular No. (RMC) 74-99, however, now
116 Article 2.8, Chapter I of EO 226.
clearly and correctly provides that any VAT-registered supplier’s
117 §51, Chapter VI of RA 7916.
sale of goods, property or services from the customs territory to any
118 Tiu v. Court of Appeals, 361 Phil. 229, 242; 301 SCRA 278, 289, January 20,
registered enterprise operating in the ecozone—regardless of the
1999.
class or type
111
of the latter’s PEZA registration—is legally entitled to
119 1st paragraph of §2, RA 7227.
a zero rate.
120 §§12 and 15 of RA 7227.
Second, the policies of the law should prevail. Ratio legis est
121 John Hay Peoples Alternative Coalition v. Lim, 414 SCRA 356, 369, October 24,
anima. The reason for the law is its very soul.
2003.
In PD 66, the urgent creation of the EPZA which preceded the
122 2nd paragraph of §2, RA 7227.
PEZA, as well as the establishment of export processing zones,
seeks “to encourage and promote foreign commerce as a means of x 155
x x strengthening our export trade and foreign exchange position, of
hastening industrialization, of reducing domestic 112 unemployment,
and of accelerating the development of the country.” VOL. 451, FEBRUARY 11, 2005 155

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Commissioner of Internal Revenue vs. Seagate Technology lower courts and the mode of appeal taken by petitioner before this
(Philippines) Court.
The PEZA law, which carried over the provisions of the EPZA
Finally, under RA 7844, the State declares 123 the need “to evolve law, is clear in exempting from internal revenue laws and
export development into a national effort” in order to win regulations the equipment—including capital goods—that
international markets. By providing many export and tax registered enterprises
132
will use, directly or indirectly, in
124
incentives, the State is able to drive home the point that manufacturing. EO 226 even reiterates 133
this privilege among the
exporting is indeed “the key to national survival and the means incentives it gives to such enterprises. Petitioner merely asserts
through which the economic goals of increased employment and that by virtue of the PEZA registration alone of respondent, the
125
enhanced incomes can most expeditiously be achieved.” latter is not subject to the VAT. Consequently, the capital goods and
The Tax Code itself seeks to “promote sustainable economic services respondent has purchased are not considered 134
used in the
growth x x x; x x x increase economic activity; and x x x create a VAT business, and no VAT refund or credit is due. This is a non
robust environment for business to enable firms to compete better sequitur. By the VAT’s very nature as a tax on consumption, the
126
in the regional as well as the global market.” After all, capital goods and services respondent has purchased are subject to
international competitiveness requires economic and tax incentives the VAT, although at zero rate. Registration does not determine
to lower the cost of goods produced for export. State actions that taxabil-ity under the VAT law.
affect global competition need to be 127 specific and selective in the
pricing of particular goods or services. _______________
All these statutory policies are congruent to the constitutional
128
mandates of providing incentives to needed investments, as well 130 Schwab, extract from the Preface of the Global Competitiveness Report 2003-
as of promoting the preferential use of domestic materials and 2004, www.weforum.org, last visited January 27, 2005, 9:05am PST.
locally produced goods and adopting measures to help make these 131 §236 of the Tax Code.
129
competitive. Tax credits for domestic inputs strengthen backward 132 §17(1) of PD 66 and §56, Chapter VI of RA 7916.
linkages. Rightly so, “the rule of law and the existence of credible 133 Article 77(1), Book VI of EO 226.
and efficient 134 Petitioner’s Memorandum, p. 9; Rollo, p. 103.

157
_______________

123 1st paragraph of §2, Article I of RA 7844. VOL. 451, FEBRUARY 11, 2005 157
124 §§4(c) of Article I, 16, and 17 of RA 7844.
Commissioner of Internal Revenue vs. Seagate Technology
125 2nd paragraph of §2, Article I of RA 7844.
(Philippines)
126 §2 of the Tax Code, as amended by RA 8761 effective January 1, 2000; and by
RA 9010, the effectivity of which has been retroacted to January 1, 2001.
127 American Society of International Law Proceedings, “Indigenous People and Moreover, the facts have already been determined by the lower
the Global Trade Regime,” 96 Asilproc 279, 281, March 16, 2002. courts. Having failed to present evidence to support its135contentions
128 §20 of Article II of the 1987 Constitution. against the income tax holiday privilege of respondent, petitioner
129 2nd paragraph of §1 and §12 of Article XII of the 1987 Constitution. is deemed to have conceded. It is a cardinal rule that “issues and
arguments not adequately and seriously136brought below cannot be
156 raised for 137the first time on appeal.” This
138
is a “matter of
procedure” and a “question of fairness.” Failure to assert
“within a reasonable time warrants a presumption that the party
156 SUPREME COURT REPORTS ANNOTATED 139
entitled to assert it either has abandoned or declined to assert it.”
Commissioner of Internal Revenue vs. Seagate Technology The BIR regulations additionally requiring an approved prior
140
(Philippines) application for effective zero rating cannot prevail over the clear
VAT nature of respondent’s transactions. The scope of such
public institutions are130 essential prerequisites for sustainable regulations is not
141
“within the statutory authority x x x granted by
economic development.” the legislature.
First, a mere administrative issuance, like a BIR regulation,
VAT Registration, Not Application cannot amend the law; the 142
former cannot purport to do any more
for Effective Zero Rating, than interpret the latter. The courts will not coun-
Indispensable to VAT Refund
131 _______________
Registration is an indispensable requirement under our VAT law.
Petitioner alleges that respondent did register for VAT purposes 135 CA Decision, p. 7; Rollo, p. 27; and CTA Decision, p. 5, Rollo, p. 35.
with the appropriate Revenue District Office. However, it is now too 136 Magnolia Dairy Products Corp. v. National Labor Relations Commission, 322
late in the day for petitioner to challenge the VAT-registered status Phil. 508, 517; 252 SCRA 483, 490, per Francisco, J.
of respondent, given the latter’s prior representation before the

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137 Commissioner of Internal Revenue v. Procter & Gamble Philippine VOL. 451, FEBRUARY 11, 2005 159
Manufacturing Corp., 204 SCRA 377, 383, December 2, 1991, per Feliciano, J.
Commissioner of Internal Revenue vs. Seagate Technology
138 Ibid. See Advertising Associates, Inc. v. Collector of Internal Revenue, 97 Phil.
(Philippines)
636, 641, September 30, 1955.
139 Atlas Consolidated Mining & Development Corp. v. Commissioner of Internal
Revenue, 102 SCRA 246, 259, January 27, 1981, per De Castro, J.
A VAT-registered
147
status, as well as compliance with the invoicing
140 §4.107-1(d) of RR 7-95.
requirements, is sufficient for the effective zero rating of the
141 Commissioner of Internal Revenue v. Solidbank Corp., supra, p. 448, per
transactions of a taxpayer. The nature of its business and
Panganiban, J.
transactions can easily be perused from, as already clearly
142 Vitug and Acosta, supra, p. 56.
indicated in, its VAT registration papers and photocopied
documents attached thereto. Hence, its transactions cannot be
158 exempted by its mere failure to apply for their effective zero rating.
Otherwise, their VAT exemption would be determined, not by their
nature, but by the taxpayer’s negligence—a result not at all
158 SUPREME COURT REPORTS ANNOTATED
contemplated. Administrative convenience cannot thwart legislative
Commissioner of Internal Revenue vs. Seagate Technology mandate.
(Philippines)
Tax Refund or
tenance one that overrides the statute it seeks to apply and Credit in Order
143
implement.
Having determined that respondent’s purchase transactions are
Other than the general registration of a taxpayer the VAT status
subject to a zero VAT rate, the tax refund or credit is in order.
of which is aptly determined, no provision under our VAT law
As correctly held by both the CA and the Tax Court, respondent
requires an additional application to be made for such taxpayer’s
had chosen the fiscal incentives in EO 226 over those in RA 7916
transactions to be considered effectively zero-rated. An effectively
and PD 66. It opted for the income tax holiday regime instead of the
zero-rated transaction does not and cannot become exempt simply
5 percent preferential tax regime.
because an application therefor was not made or, if made, was
The latter scheme is not a perfunctory aftermath149of a simple
denied. To allow the additional requirement is to give unfettered 148
registration under the PEZA law, for EO 226 also has
discretion to those officials or agents who, without fluid
provisions to contend with. These two regimes are in fact
consideration, are bent on denying a valid application. Moreover,
incompatible and cannot be availed of simultaneously by the same
the State can never be estopped by the omissions, mistakes or
144 entity. While EO 226 merely exempts it from income taxes, the
errors of its officials or agents.
PEZA law exempts it from all taxes.
Second, grantia argumenti that such an application is required
Therefore, respondent can be considered exempt, not from the
by law, there is still the 145presumption of regularity in the
VAT, but only from the payment of income tax for a certain number
performance of official duty. Respondent’s registration carries
of years, depending on its registration as a pioneer or a non-pioneer
with it the presumption that, in the absence of contradictory
enterprise. Besides, the remittance of the aforesaid 5 percent of
evidence, an application for effective zero rating was also filed and
gross income earned in lieu of local
approval thereof 146 given. Besides, it is also presumed that the law
has been obeyed by both the administrative officials and the
applicant. _______________
Third, even though such an application was not made, all the 147 §113(A) of the Tax Code.
special laws we have tackled exempt respondent not only from 148 §24, Chapter III of RA 7916, as amended by §4 of RA 8748.
internal revenue laws but also from the regulations issued pursuant 149 1st paragraph, §23, Chapter III of RA 7916.
thereto. Leniency in the implementation of the VAT in ecozones is
an imperative, precisely to spur economic growth in the country and 160
attain global competitiveness as envisioned in those laws.
160 SUPREME COURT REPORTS ANNOTATED
_______________
Commissioner of Internal Revenue vs. Seagate Technology
143 Id., p. 57. (Philippines)
144 Spouses Morandarte v. Court of Appeals, G.R. No. 123586, August 12, 2004,
436 SCRA 213, 225. and national taxes imposable upon business establishments within
145 §3(m) of Rule 131 of the Rules of Court. the ecozone cannot outrightly determine a VAT exemption. Being
z subject to VAT, payments erroneously collected thereon may then
146 §3(ff) of Rule 131 of the Rules of Court. be refunded or credited.
159
Even if it is argued that respondent is subject to the 5 percent
preferential tax regime in RA 7916, Section 24 thereof does not
preclude the VAT. One can, therefore, counterargue that such

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provision merely exempts respondent from taxes imposed on
business. To repeat, the VAT is a tax imposed on consumption, not
on business. Although respondent as an entity is exempt, the
transactions it enters into are not necessarily so. The VAT
payments made in excess of the zero rate that is imposable may
certainly be refunded or credited.
Compliance with All Requisites
for VAT Refund or Credit
As further enunciated by the Tax Court, respondent 150 complied with
all the requisites for claiming a VAT refund or credit.
First, respondent is a VAT-registered entity. This fact alone
distinguishes the present case from Contex, in which this Court
held that151the petitioner therein was registered as a non-VAT
taxpayer. Hence, for being merely VAT-exempt, the petitioner in
that case cannot claim any VAT refund or credit.
Second, the input taxes paid on the capital goods of respondent
are duly supported by VAT invoices and have not
_______________
150 As a matter of principle, it is inadvisable to set aside such a conclusion,
because by the very nature of its functions and sans abuse or improvident exercise of
its authority, the Tax Court is “dedicated exclusively to the study and consideration
of tax problems and has necessarily developed an expertise on the subject x x x.”
Paseo Realty & Development Corp. v. Court of Appeals; supra, per Tinga, J., p. 8.
151 Contex Corp. v. Hon. Commissioner of Internal Revenue, G.R. No. 151135, July
2, 2004, 433 SCRA 376, 386.
161
VOL. 451, FEBRUARY 11, 2005 161
Commissioner of Internal Revenue vs. Seagate Technology
(Philippines)
been offset against any output taxes. Although enterprises
registered with the BOI after December 31, 1994 would no longer
enjoy the tax credit incentives on domestic capital equipment—as152
provided for under Article 39(d), Title III, Book I of EO 226 —
starting January 1, 1996, respondent would still have the same
benefit under a general and express exemption contained in both
Article 77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of
RA 7227, extended to the ecozones by RA 7916.
There was a very clear intent on the part of our legislators, not
only to exempt investors in ecozones from national and local taxes,
but also to grant them tax credits. This fact was revealed by the
sponsorship speeches in Congress during the second reading of
House Bill No. 14295, which later became RA 7916, as shown below:
“MR. RECTO. x x x Some of the incentives that this bill provides are
exemption from national and local taxes; x x x tax credit for locally-sourced
inputs x x x.”
x x x      x x x      x x x
“MR. DEL MAR. x x x To advance its cause in encouraging investments
and creating an environment conducive for investors, the bill offers
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incentives such as the exemption from local and national taxes, x x x tax
153
credits for locally sourced inputs x x x.”
And third, no question as to either the filing of such claims within
the prescriptive period or the validity of the VAT returns has been
raised. Even if such a question were raised, the tax exemption
under all the special laws cited above is broad enough to cover even
154
the enforcement of internal revenue laws, including prescription.
_______________
152 This provision has been expressly repealed by the 2nd paragraph of §20 of RA
7716. See note 94.
153 Legislative Archives, Committee Report No. 01027, House of Representatives,
December 14, 1994, pp. 00132 & 00141.
154 Commissioner of Customs v. Philippine Phosphate Fertilizer Corp.; supra, pp.
9-10.
162
162 SUPREME COURT REPORTS ANNOTATED
Commissioner of Internal Revenue vs. Seagate Technology
(Philippines)
Summary
To summarize, special laws expressly grant preferential tax
treatment to business establishments registered and operating
within an ecozone, which by law is considered as a separate customs
territory. As such, respondent is exempt from all internal revenue
taxes, including the VAT, and regulations pertaining thereto. It has
opted for the income tax holiday regime, instead of the 5 percent
preferential tax regime. As a matter of law and procedure, its
registration status entitling it to such tax holiday can no longer be
questioned. Its sales transactions intended for export may not be
exempt, but like its purchase transactions, they are zero-rated. No
prior application for the effective zero rating of its transactions is
necessary. Being VAT-registered and having satisfactorily complied
with all the requisites for claiming a tax refund of or credit for the
input VAT paid on capital goods purchased, respondent is entitled
to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision
AFFIRMED. No pronouncement as to costs.
SO ORDERED.
          Sandoval-Gutierrez, Corona, Carpio-Morales and Garcia,
JJ., concur.
Petition denied, judgment affirmed.
Note.—While tax avoidance schemes and arrangements are not
prohibited, tax laws cannot be circumvented in order to evade the
payment of just taxes. (Commissioner of Internal Revenue vs.
Lincoln Philippine Life Insurance Company, Inc., 379 SCRA 423
[2002])
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